Title: Strategy, Process, Content, Context, an international perspectiveAuthors: Bob de wit en Ron MeyerThird editionChapter 6,7,8 and 11 (each chapter also contains two readings)

Chapter 6 Corporate level strategy

Firms have a lot of growth options, while staying within the boundaries of a single business or broaden their scope even further through venturing into other lines of business and becoming multi-business corporations.

Vertical integration: when a firm enters other businesses upstream or downstream within its own industry column. It can strive for backward integration by getting involved in supplier businesses or it can initiate forward integration by entering the businesses of its buyers.

Horizontal integration: if the firm integrate related businesses at the same tier in the industry column.

(Horizontal) diversification: if a firm expands outside of its current industry.

The issue of corporate configuration: the issue of deciding on the best array of businesses and relating them to one another. Determining this can be disentangled into two main questions:

1. What business should the corporation be active in? (corporate composition.2. How should this group of business be managed? (corporate management).

Corporate compositionThis can be divided into:

- corporate scope (how many businesses)- corporate distribution (the relative size of the activities in each business are covered)

A common way of depicting the corporate composition is to plot all of the businesses in a “portfolio matrix”.

Portfolio: the set of business activities carried out by the corporation. The intention of a portfolio matrix is not merely to give an overview of the corporate scope and distribution. But also to provide insight into the growth and profitability potential of each of the corporation’s business activities and judge the balance between the various business activities. There are different types of portfolio matrices, two most well known are:

1 The Boston Consulting Group matrix (BCG matrix)2 General Electric business (GE business screen)

Both have the same analytical format. Each business activity is mapped along two dimensions. One measuring the attractiveness of the business itself (external opportunity), the other measuring the strength of the corporation to compete in the business (internal strength).

Corporate managementThis can be divided into:

- Integration (how are synergies realized)- Management (who ensure synergies are realized)

The corporation can be divided into business units with the intent of focusing each on separate business areas, but this differentiation must be offset by a certain degree of integration to be able to address common issues and realize synergies. Three key integration mechanisms can be distinguished:

1 Centralization, bringing resources and activities together into one unit.

2 Coordination, creating a common norm across business units for resources, activities and/or product offerings.

3 Standardization, orchestration of different business units in terms of resources, activities and/or product offerings.

It are the tools available to managers to achieve a certain level of harmonization between the various parts of the corporate whole. Basically there are two organizational means available to secure the effective deployment of the integration mechanism:

1 Control- Financial control style (SBU’s are highly autonomous from the corporate center)- Strategic control style (SBU’s have a closer relationship with the corporate center)- Strategic planning style (SBU’s have relatively little autonomy from the corporate

center)2 Cooperation

The paradox of responsiveness and synergySynergy: more than the sum of the parts

According to Porter entering into another business (by acquisition or internal growth) can only result in increased shareholders value if three essential tests are passed:

1 The attractiveness test, firms should only enter businesses where there is a possibility to build up a profitable competitive position.

2 The cost-of-entry test, firms should only enter new businesses if it is possible to recoup the investments made.

3 The better-of test, firms should only enter new businesses if it is possible to create significant synergies.

The areas of relatedness that have the potential for creating synergy can be organized into three categories; resource relatedness, product offering relatedness and activity relatedness.

Figure Business framework

Synergy by levering resource- Achieving resource reallocation- Achieving resource replication

Synergy by aligning positions- Improving bargaining position- Improving competitive position

Synergy by integrating activities- Sharing value adding activities- Linking value adding activities

Vertical integration is also referred to as “internalization” because firms decide to perform activities inside the firm, instead of dealing with outside suppliers and buyers. In general, companies will strive to integrate upstream or downstream activities where one or more of the following conditions are deemed important:

- Operational coordination- Avoidance of transaction costs- Increased bargaining power- Learning curve advantages- Implementing system-wide changes

Responsiveness: the ability to respond to the competitive demand of a specific business area in a timely and adequate manner

Major problems at the moment encountered by multi-business firms are the following:- High governance costs- Slower decision-making- Strategy incongruence- Dysfunctional control- Dulled incentives

Perspectives on corporate level strategy The portfolio organization perspectiveStrategists who believe that multi-business firms should be viewed as portfolios of autonomous business units in which the corporation has a financial stake. They argue that business responsiveness is crucial and that only a limited set of financial synergies should be pursued.

The integrated organization perspectiveStrategists who believe that corporations should be tightly integrated, with a strong central core of shared resources, activities and/or product offerings keeping the firm together. They argue that corporations built up around these strong synergy opportunities can create significantly more value than is lost through limitations to responsiveness.

Reading 6.1 strategy and the business portfolioBarry Hedley

Hedley is a proponent of the portfolio perspective. His argument is based on the premise that a complex corporation can be viewed as a portfolio of business, which each has their own competitive arena to which they must be responsive.

The importance of market growth is twofold:1 Easier en lower cost to gain market share2 It provides the opportunity for investments

The growth-share matrix (the business portfolio)The essence of the portfolio approach is therefore that strategy objectives must vary between businesses. This is depicted in figure 6.3.

Figure The business portfolio or growth-share matrix

Chapter 6 Portfolio Core Competence Emphasis on Responsiveness SynergyView of Competition Firms Compete Corporations Compete

Within a Business Across BusinessesCompetitive Strategy at Business Level Corporate LevelKey Success Factor Responsiveness Competence Leveraging

to Business Demands Corporate Composition Potentially Unrelated Shared Competence-base

(Diverse) (Focused)Multibusiness Synergy Cash Flow Optimization Rapid Competence BuildingTask of Corporate Center Capital Allocation to SBUs Create & Use Competences Position of Business Units Highly Autonomous Highly Integrated

(Independent) (Interdependent)Coordination Between SBU's Low, Incidental High, StructuralCorporate Control Style Setting Financial Objectives Joint Strategy DevelopmentDiversification Acquisitions Simple to Accommodate Difficult to Integrate

Stars: high growth, high share. Growing rapidly, they use large amounts of cash to maintain position.Cash cows: low growth, high share. Have an entranced superior market position and low costs.Dogs: low growth, low share. Their poor competitive position condemns them to poor profits.Question marks: high growth, low share. Have the worst cash characteristics of all. Only two strategy alternatives. The first one is to make whatever investments are necessary to gain share, tot try to fund the business to dominance so that it can become a star and, ultimately a cash cow when the business matures. The other alternative strategy is divestment. Question marks are costly.

The cash generated by the cash cows should be used as a first priority to maintain or consolidate position in those stars which are not self-sustaining. Virtually all companies have at least some dog businesses. It is essential that the fundamentally weak strategic position of the dogs be recognized for what they are.

Reading 6.2 The core competence of the corporation C.K. Prahalad and Gary Hamel

The diversified corporation is a large tree. The trunk and major limbs are core products, the smaller branches are business units; the leaves flowers, and fruit are end products. The root system that provides nourishment, sustenance, and stability is the core competence.

Figure Competencies as the roots of competitiveness

Building core competencies is more ambitious and different than integrating vertically, moreover. Managers deciding whether to make or buy will start with end products and look upstream to the efficiencies of the supply chain and downstream toward distribution and customers. They do not take inventory of skills and look forward to applying them in nontraditional ways.

At least three tests can be applied to identify core competencies in a company, a core competence:

1 Provides potential access to a wide variety of markets.2 Should make a significant contribution to the perceived customer benefits of the

end product.3 Should be difficult for competitors to imitate.

Core products: are the components or sub-assemblies that actually contribute to the value of the end products

Three levels of competition:1 Core competence2 Core products3 End products

Disadvantages of the SBU mindset:- Underinvestment in developing core competencies en core products, when the

organization is conceived of as multiplicity of SBU’s, no single business may feel responsible for maintaining a viable position in core products or be able to justify the investment required to build world leadership in some core competence.

- Imprisoned resources, SBU managers are not only unwilling to lend their competence carriers but they may actually hide talent to prevent its redeployment in the pursuit of new opportunities.

- Bounded innovation, if core competencies are not recognized, individual SBUs will pursue only those innovation opportunities that are close at hand (marginal product-line or geographic expansions).

Strategic architecture: a road map of the future that identifies which core competencies to build and their constituent technologies.

Corporate level strategy in international perspective

A number of factors that might be of influence on how the paradox of responsiveness and synergy is managed in different countries:

1 Functioning of capital and labor marketsEven in the group of developed economies, various degradations of capital market efficiency seem to exist, suggestion various degrees to which corporations can create value by adopting the role of investors. The same argument can be put forward for the efficiency of ‘managerial labor’ markets. Different degrees of labor market flexibility exist, suggesting that corporations in some countries might be able to create more value as developers and allocators of management talent than in other countries.

2 Leveraging of relational resourcesThe clustering of business around key external relationships and power bases will vary strongly across nations. In some countries relational resources are more important than in others.

3 Costs of coordinationIn many countries coordination is not an unfortunate fact of life, but a natural state of affairs. It is reasonable to expect a stronger preference for the portfolio perspective in countries that favor mechanistic organizations.

4 Preference for controlPreference for control depends on how managers deal with the paradox of competition and cooperation (chapter 7).

Chapter 7 Network level strategy

Where two or more firms move beyond a mere transactional relationship and work jointly towards a common goal, they form an alliance, partnership or network. Their shared strategy is referred to as a network level strategy. In such a case, strategy is not only ‘concerned’ with relating a firm to its environment, but also with relating a network to its broader environment.

All firms must necessarily interact with other organizations (and individuals) in their environment and therefore they have inter-organizational (or inter-firm) relationships.Four aspects of inter-organization relationships:

1 Relational actors (Who are the possible partners for interactions?)The four main categories of relationships between the firm and other industry parties are the following:

- Upstream vertical (supplier) relations- Downstream vertical (buyer) relations- Direct horizontal (industry insider) relations- Indirect horizontal (industry outsider) relations

Besides relationships with these industry actors, there can be many contacts with condition-setting parties in the broader environment. Employing the classic SEPTember distinction, the following rough categories of contextual actors can be identified:

- Socio-cultural actors- Economic actors- Political/legal actors- Technical actors

Figure The firm and its web of relational actors

2 Relational objectives (Why do they want to interact?)Relations oriented towards leveraging resources:

- Learning, exchange knowledge and skills- Lending, lend resources for better use

Relations oriented towards integrating activities:- Linking, exchange product/services- Lumping, similar activities (economies of scale)

Relations oriented towards aligning positions- Leaning, improve bargaining position with other industry actors- Lobbying, gain a stronger position with contextual actors

3 Relational factors (What factors influence those relationships?)- Legitimacy, written and unwritten codes of conduct give direction to what is

viewed as acceptable behavior- Urgency, time pressure- Frequency, current interaction and expectations of future interactions

Socio-Cultural Actors(community groups,

media, opinion leaders, religious organizations)

Industry Outsiders(Complimentors)

Indirect Horizontal Relations

Industry Insiders(Competitors)

Direct Horizontal Relations

Suppliers

Upstream Vertical Relations

Economic Actors(tax offices, central

banks, stock exchanges, unions)

Buyers

Downstream Vertical Relations

Technological Actors(patent offices,

universities, research institutes, standardization

bodies)

Political/Regulatory Actors

(governments, lobbyists, regulators

Firm

- Power, the ability to influence others’ behavior

One way of measuring relative power in a relationship is portrayed in the following figure, where a distinction is made between the closeness of the relationship (loose vs. tight) and the distribution of power between the two parties involved (balanced vs. unbalanced).

Figure Relative power positions in inter-organizational relationships

4 Relational arrangements (How is the relationship structured?)Within a firm coordination is achieved by means of direct control, leading transaction cost economies to refer to this organizational form as a ‘hierarchy’. In a hierarchy a central authority governs internal relationships and has the formal power to coordinate strategy and solve inter-departmental disputes. In the environment, relationships between firms are non-hierarchical, as they interact with one another without any explicit coordination dispute settlement mechanism. This organizational form is referred as “market”. In reality, however, there are many organizational forms between markets and hierarchies.

The paradox of competition and cooperationCompetition: the act of working against others, where two or more organizations’ goals are mutually exclusive. Where one’s win is the other’s loss. To be competitive an organization must have the power to overcome its revivals and it must have the ability and will to use its power.

Cooperation: the act of working together with others, where two or more organizations’ goals are mutually beneficial. Both sides need each other to succeed. Organizations must be willing to behave as partners, striving towards their common good. Trust on both sides of a relationship is very important.

Perspectives on network level strategyThe discrete organization perspective: strategists who believe that is best for companies to be primarily competitive in their relationships to all outside forces. They argue that firms should remain independent and interact with other companies under market conditions as much as possible. These strategists emphasize the discrete boundaries separating the firm from its competitive environment.

The embedded organization perspective: strategists who believe that companies should strive to build up more long-term cooperative relationship with key organizational in their environment. They argue that firms can reap significant benefits by surrendering a part of their independence and developing close collaborative arrangements with a group of other organizations.

Reading 7.1 Collaborate with your competitors-and winGary Hamel, Yves Doz and C.K. Prahalad

The authors of this reading basically take the same stance as Porter, in assuming that inter-firm relations are largely competitive and governed by power and calculation.

Companies that benefit most from competitive collaboration adhere to a set of simple but powerful principles:

- Collaboration is competition in a different form- Harmony is not the most important measure of success- Cooperation has limits- Learning from partners is paramount

There’s a certain paradox. When both partners are equally intent on internalizing the other’s skills, distrust and conflict may spoil the alliance and threaten its very survival.There are certain conditions under which mutual gain is possible, at least for a time:

- The partners’ strategic goals converge while their competitive goals diverge.- The size and the market power of both partners is modest compared with industry

leaders.- Each partner believes it can learn from the other and at the same time limit access

proprietary skills.

Companies must carefully select what skills and technologies they pass to their partners. The must develop safeguards against unintended, informal transfers of information.

- Companies must take steps to limit transparency.- Limit the scope of the formal agreement.- Specific performance requirements.- Not too much collegiality.

Emphasis on Competition Cooperation Structure of env. Discrete Firm Embedded Firm

(atomistic) (networked)Firm boundaries Distinct FuzzyPreferred position Independence InterdependenceInteraction outcomes Mainly zero-sum Often positive-sum

(win/lose) (win/win)Source of advantage Bargaining power Specialization & coordinationMulti-Firm strategy No YesUse of co-operation Temporary Durable partnerships

(tactical) (strategic)Basis of co-op Power & calculation Trust & reciprocityStructure of co-op Limited, well-defined, Broad, open,

contract-based relationship-based

Chapter7 Discrete Organization Embedded Organization

Enhance the capacity to learn:- To learn, one must want to learn- Learning begins at the top- Competitive benchmarking

Japanese companies learn more from their western partners than vice versa, because western companies approach them with the attitude of teachers and the Japanese companies are the students.

Whether a company controls 51 percent or 49 percent of a joint venture may be much less important than the rate at which each partner learns from the other.

Reading 7.2 Creating a strategic center to manage a web of partnersGianni Lorenzoni and Charles Baden-Fuller

In the view of the authors, a group of firms that work closely together can form a ‘virtual company’. This type of network can benefit from most of the advantages of being a large vertically integrated company, while avoiding most of the pitfalls of integration. But that it is necessary for a network of firms to have a strategic center that can act as builder and coordinator.

Three dimensions of the strategic center:1 As a creator of value for its partners

The main features of this role are:- Strategic outsourcing (subcontract), collect partners who contribute to the system.

Roles are clearly defined in a positive en creative way. In strategic networks, partners are more than doers or actors; it is the norm rather than an exception for partners to be innovators.

- Capability, help partners develop core competencies. High competitiveness force them then to share their expertise with the network.

- Technology, borrow ideas from others which are developed and exploited to create and master new technologies (borrow-develop-lend).

- Competition, encourage rivalry inside the network in a positive way.

2 As leader, rule setter, and capability builderCentral firms have to develop some critical core competencies (these are, in general, quite different from those stressed by most managers in traditional firms):

- The idea, creating a vision in which partners play a critical role- The investment, a strong brand image and effective systems and support- The climate, creating an atmosphere of trust and reciprocity- The partners, developing mechanisms for attracting and selecting partners

3 As simultaneously structuring and strategizingThe most difficult battle is the battle between firms adopting different strategies and different approaches to the market. In these battles, the winners are usually those who use fewer and different resources in novel combinations. Marketing and information sharing is very important. Learning races create a sense of competition and rivalry, but within an overall common purpose. But they can be destructive rather than constructive if the partners do not have the skills and resources.

Durable partnerships between multiple firms is not easy, but if this interdependence can be managed well, it can give the group a strong competitive edge against others.

Network level strategy in international perspective

Many authors suggest that there are recognizable national inclinations, even national styles.A number of characteristics are possible influences on how the paradox of competition and cooperation is dealt with in different national settings. 1 Level of individualism

More individualist cultures (English-speaking countries) accentuate the position of each single person as a distinct entity, while more collectivist cultures (Japan) stress people’s group affiliation.

2 Type of institutional environmentGerman Cooperative capitalismJapan Group capitalismFrench Bureaucratic capitalismItaly Familial capitalismU.S. Managerial capitalismU.K. Personal capitalism

3 Market for corporate controlWhere horizontal and vertical integration is difficult to achieve (no stock exchange, closed market), but working together is still beneficial, potential acquirers often only have collaborative arrangements as an alternative.

4 Type of career pathsIn countries (such as Japan and Germany) where stable, long-term employment is still common, individuals are in a better position to build up durable personal relationships with people in other firms.

Chapter 8 The industry context

The key issue in this chapter is how industry development takes place.

Dimensions of industry development:- Convergence - divergence- Concentration - fragmentation- Vertical integration – fragmentation- Horizontal integration – fragmentation- International integration – fragmentation- Expansion – contraction

Patterns of dominant business model development:1 Gradual development, in an industry where one business model is dominant for a

long time and is slowly replaced by an alternative that is slight improvement.2 Continuous development, in an industry where changes to the dominant business

model are more frequent, but still relatively modest.3 Discontinuous development, in an industry where one business model is dominant

for a long period of time and is then suddenly displaced by a radically better one.4 Hypercompetitive development, in an industry where business models are

frequently pushed aside by radically better ones. Figure Patterns of dominant business model development

A large number of factors can contribute to rigidity, thereby inhibiting industry development. Some of the most important ones are the following:

- Underlying conditions, some structural industry factors, for example economies of scale, can be inherent to the industry and resist any attempt to change them.

- Industry integration, some industries can be locked in to a specific structure for a long period of time because of the complex linkages between various aspects.Power structures, powerful industry incumbents have often much to lose and little to gain when the ‘rules of the game’ change.Risk averseness, how rigid an industry is, will be dependent on how risk avers the various parties are.Industry recipes, the common understanding of the ‘rules of the game’ can limit people’s openness to rule changers.Institutional pressures, firms can experience strong pressures from all kind of institutions prescribing behavioral standards.

The paradox of compliance and choiceOn the one hand, managers must be willing to irreverently transgress widely acknowledged industry rules, going against what they see as the industry recipe. On the other hand, managers must respectfully accept many characteristics of the industry structure and play according to existing rules of the competitive game.

Where firms cannot influence the structure of their industry, compliance to the rules of the game is the strategic imperative. Under these circumstances, the strategic demand is for managers to adapt the firm to the industry structure. Where firms do have the ability to manipulate the industry structure, they should exercise their freedom of choice to break the industry rules. In such case, the strategic demand is for managers to try to change the terms of competition in their own favor.

Perspectives on the industry contextThe industry dynamics perspective: strategists who argue that industry development is an autonomous process, which individual firms can hardly hope to shape. They believe that compliance to shifting industry characteristics is mandatory – adjust or risk being selected out. This perspective is often referred as the industry evolution perspective, due to the strong parallel with the biological evolution (survival of the fittest).The objective of a firm should be to co-evolve with its environment, instead of trying to conquer it.

The industry leadership perspective: strategists who believe that the industry context can be shaped in an infinite variety of ways by innovative firms. Therefore, industry development can be driven by firms willing and able (innovative companies) to take a leading role. It is up to the strategist to identify which rules of the game must be respected and which can be ignored in the search for new strategic options.

Reading 8.1 Industry evolutionMichael Porter

Porter is strongly affiliated with the industry dynamics perspective, but who is not fully in their camp, because he also believes that firms can have some influence on the evolution of the industry structure. Industry evolution should not be greeted as a fait accompli to be reacted to, but as an opportunity.

There’s a need for analytical techniques that will aid in anticipating the pattern of industry changes we might expect to occur (predict evolution). Two analytical techniques:

1 The product life cycleThe product life cycle has attracted some legitimate criticism:

- The duration of the stages varies widely from industry to industry, and it is often not clear what stage of the life cycle an industry is.

- Industry growth does not always go through the S-shaped pattern at all- Companies can affect the shape of the growth curve through product innovation and

repositioning, extending it in a variety of ways- The nature of competition associated with each stage of the life cycle is different for

different industries.The real problem with the product life cycle as a predictor of industry evolution is that it attempts to describe one pattern of evolution that will invariably occur.

2 A frame work for forecasting evolution- Initial structure- Potential structure

There are some predictable (and interacting) dynamic processes that occur in every industry in one form or another, though their speed and direction will differ from industry to industry:

- long-run changes in growth- changes in buyer segments served- buyer’s learning- reduction of uncertainty- diffusion of proprietary knowledge- accumulation of experience- expansion (or contraction) in scale

Emphasis On Compliance ChoiceIndustry Changes Uncontrollable Controllable

Evolutionary Processes Creation ProcessesChange Dynamics Env. Selects Fit Firms Firm Creates Fitting Env.Firm Success Due to Fitting Ind. Demands Manipulating Ind. DemandsIndustry Malleability Low, Slow High, FastNormative Implication Play by the Rules Change the Rules

(Adapt) (Innovate)Firm Profitability Industry-dependent Firm-dependentPoint of View Deterministic Voluntaristic

Chapter 8 Industry Evolution Industry Creation

- changes in input and currency costs- product innovation- marketing innovation- process innovation- structural change in adjacent industries- government policy change- entries and exits

An industry is an interrelated system. There is no one way in which industries evolve. However, there are some particularly important relationships in the evolutionary process:

- Industry concentration and mobility barriers move together- No concentration takes place if mobility barriers are low or falling- Exit barriers deter consolidation- Long-run profit potential depends on future structure

Reading 8.2 The firm matters, not the industryCharles Baden-Fuller and John Stopford

Baden-fuller and Stopford are advocates of the industry leadership perspective. Their conclusion is that the given industry circumstances are largely unimportant, it’s how a firm plays the game that matters.

The role of the industry in determining profitability

Old views New viewsSome industries are intrinsically more profitable than others

There is little difference in the profitability of one industry versus another

In mature environments it is difficult to sustain high profits

There is no such thing as a mature industry, only mature firms; industries inhabited by nature firms often present great opportunities for the innovative

It is environmental factors that determine whether an industry is successful, not the firms in the industry

Profitable industries are those populated by imaginative and profitable firms; unprofitable industries have unusually large numbers of uncreative firms

Recent statistical evidence does not support the view that the choice of industry is important. The correct choice of strategy appears to be at least five times more important than the correct choice of industry.

Market share and profitability

Old views New viewsLarge market share brings lower costs and higher prices and so yields greater profits

Large market share is the reward for efficiency and effectiveness

Small-share firms cannot challenge leaders If they do things better, small-share firms can challenge the leaders

The dynamics of competing in traditional industries

Old views New viewsCompetition is based on firms following well-defined traditional (or generic) approaches to the market

The real battles are fought among firms taking different approaches, especially those that counter yesterday’s ideas

The industry context in international perspective

A number of factors that might be of influence on how the paradox of compliance and choice is viewed in different countries:

1 Locus of controlPeople with an internal locus of control believe that they largely control their own fate. People with an external locus of control believe that their fate is largely the result of circumstances beyond their control. In countries where the culture is more inclined towards an internal locus of control, it is reasonable to expect that the industry leadership perspective will be more widespread and in cultures with a strong emphasis on external locus of control, the industry dynamics perspective is likely to be more predominant.

2 Time orientationIn countries with a future-orientation is it most likely that they have a stronger inclination towards the industry leadership perspective. In past-oriented and present oriented cultures, the industry dynamics perspective is more likely to be predominant.

3 Role of governmentIn countries where government has a proactive role, the industry dynamics perspective is pronounced and in countries with a less active government role, the industry leadership perspective is pronounced.

4 Network relationshipIn countries where the discrete organization perspective is predominant and firms are not entangled in a web of long-term relationships, they are better positioned for rule breaking behavior (every firm can make a difference). In these countries, the industry leadership perspective is more prevalent. In nations where firms are more inclined to operate in networks, each individual firm surrenders a part of its freedom in exchange for long-term relationships. In these countries, the industry dynamics perspective is more prevalent.

Chapter 11 Organizational purpose

Where managers have a clear understanding of their organization’s purpose, this can provide strong guidance during processes of strategic thinking, strategy formation and strategic chance.

Corporate mission: ‘sending the firm in a particular direction’ by influencing the firm’s strategy. The overall purpose of the organization.

- Why does the organization exist?- What business are we in?

Vision: the desired future state of the organization (in its environment). The aspirations on which strategists are trying to focus attention.

Objectives: usually quantitative or at least more precise targets. Relatively concrete milestones/benchmarks in line with the goals.

Figure Corporate mission and strategic vision

While the purpose of an organization is at the heart of the corporate mission, three other components can also be distinguished:

- Organizational beliefs- Organizational values- Business definition

Figure Elements of a corporate mission

A corporate mission can provide:- Direction, defining the boundaries within which strategic choices and actions must

take place.- Legitimization, convince stakeholders (inside & outside) that the firm is pursuing

valuable activities in a proper way. - Motivation, inspiring individuals to work together in a particular way.

Three important corporate governance functions can be distinguished:1 Forming function, shaping and communicating the fundamental principles that will

drive the organization’s activities.2 Performance function, contributing to the strategy process to improving the future performance of the corporation.

3 Conformance function, make sure the corporation sticks to the stated mission and strategy.

Currently, each country has its own system of corporate governance and the international differences are large. In designing a corporate governance regime, three characteristics of boards of directors are of particular importance:

1 board structureInternationally, there are major differences between countries requiring a two-tier board structure, an one-tier board structure and countries in which companies are free to choice.

- Two-tier system: there is a formal division of power, with a management board made up of the top executives and a distinct supervisory board made up of non-executives with the task of monitoring and steering the management board.- One-tier (or unitary) board system: executive and non-executive (outside) directors sit together on one board.2 board membership

The composition of boards of directors can vary sharply from company to company and from country to country (for example min. 50% labor or shareholders)

3 board of tasksThe tasks and authority of board of directors also differ quite significantly between companies.

Figure Structure of corporate governance

The paradox of profitability and responsibilityThe demand for economic profitabilityBusiness organizations must be profitable to survive. Profitability is not only a result, but also a source, of competitive power. Profitability provides a company with the financial leeway to improve its competitive position and pursue its ambitions.

The demand for social responsibilityCompanies are more than just ‘economic machines’ regulated by legal contracts. They are also networks of people, working together to a common goal. Once there is enough trust between people, they can engage in productive teamwork and invest in their mutual relationships.

Perspectives on organizational purposeThe shareholder value perspective: those people who argue that corporations are established to serve the purpose of their owners. Generally, it is in the best interest of a corporation’s shareholders to see the value of their stocks increase through the organization’s pursuit of profitable business strategies. Emphasizing profitability, what means subjecting all investments to an economic rationale (socially responsible behavior should only be undertaken if the net present value of such an investment is attractive or there is no legal way of avoiding compliance).

The stakeholder values perspective: those people who argue that corporations should be seen as joint ventures between shareholders, employees, banks, customers, supplies, governments and the community. All of these parties hold a stake in the organization and therefore can expect that the corporation will take as its responsibility to develop business strategies that are in accordance with their interests and values. Emphasizing responsibility, what means subjecting all activities to a moral and/or political rationale (asking who has a legitimate and pressing claim to be included as a beneficiary of the activities being undertaken, which can severely depress profitability).- Stakeholder management is instrumental, where is it primarily viewed as an approach or technique for dealing with the essential participants in the value-adding process.- Stakeholder management is normative, if it is based on the fundamental notion that the organization’s purpose is to serve the stakeholders.

Emphasis on Profitability ResponsibilityOrganizations seen as Instruments Joint-venturesOrg. purpose=To serve owner all parties involvedMeasure of success Share price, dividends Satisfy stakeholder

(shareholder value) (stakeholder values)Major difficulty Get agent to pursue Balance interests of

principal's interests various stakeholdersCorporate governance Independent outside Stakeholder directors with shares representationmanage Stakeholder Means End and meansSocial responsibility Individual matter, Both individual

not organizational and organizationalSociety best served by Pursuing self-interest Pursuing joint-interests

(economic efficiency) (economic symbiosis)

Chapter 11 Shareholder Value Stakeholder Values

Reading 11.1 Shareholder value and corporate purposeAlfred Rappaport

Rappaport’s argument is straightforward; the primary purpose of corporations should be to maximize shareholder value.

The interest in shareholder value is gaining momentum as a result of several recent developments:

- The threat of corporate take-overs by those seeking undervalued, undermanaged assets.

- Impressive endorsements by corporate leaders who have adopted the approach.- The growing recognition that traditional accounting measures such as EPS and

ROI (return on investment) are not reliably linked to increasing the value of the company’s shares.

- Reporting of returns to shareholders along with other measures of performance in the business press (such as Fortune’s annual ranking of the 500 leading industrial firms).

- A growing recognition that executives’ long-term compensation needs to be more closely tied to returns to shareholders.

It is important to recognize that the objectives of management may in some situations differ from those of the company’s shareholders. Managers, like other people, act in their self-interest. But the mangers must work for the owners instead of act in self-interest (the principle-agent problem).

There are at least four major factors that will induce management to adapt a share holder orientation:

1 A relatively large ownership position2 Compensation tied to shareholder return performance3 Threat of take-over by another organization4 Competitive labor markets for corporate executives

The preferred solution of Rappaport is not to change corporate government structures, but to more tightly align the interests of both groups (managers and shareholders).

Reading 11.2 Stockholders and stakeholders: A new perspective on corporate governanceEdward freeman and David Reed

Freeman and Reed have a strong preference for the stakeholder concept what is largely based on the pragmatic argument that, in reality, stakeholders have the power to seriously affect the continuity of the corporation.

In 1977, when stakeholders were getting a more important role in strategic management processes, the Warton School began a stakeholder project. To date the project has explored the implications of the stakeholder concept on three levels:

1 As a management theoryTwo problems at this level. The first one is the actual definition of stakeholderTwo definitions:

- Wide sense: any identifiable group of individual who can effected the achievement of an organization’s objectives or who is affected by the achievement of an organization’s objectives.

- Narrow sense: any identifiable group of individual on which the organization is dependent for its continued survival.

Second issue: the generation of perspective propositions which explain actual cases and articulate regulative principles for future use, for example:

- Generalize the marketing approach- Establish negotiation processes- Establish a decision philosophy- Allocate organizational resources based on the degree of importance of the

environmental turbulence

2 As a process for practitionersStakeholder concepts have been used in the following strategy formulation processes:

- The stakeholder strategy process: a systematic method for analyzing the relative importance of stakeholders and their cooperative potential and their competitive threat.

- The stakeholder audit process: a systematic method for identifying stakeholders and assessing the effectiveness of current organizational strategies.

3 As an analytical frameworkAn analytical device depicts an organization’s stakeholders on a two-dimensional grid-map.

- The first dimension is one of ‘interest’ or ‘stake’.- The second dimension of a stakeholder is its power. By economic power they mean

the ability to influence due to marketplace decisions, and by political power they mean the ability to influence due to use of the political process.

Figure Classical grid

Of course, each organization will have its own individual grid, but in the real world the grid looks more like the next figure than the classical grid.

Figure Real world stakeholder grid

The debate on corporate governance and, in particular corporate democracy has recently intensified. Corporate democracy has come to have at least three meanings over the years, which prescribe that corporations should be made more democratic by:

1 Increasing the role of government2 Allowing citizens or public participation in the managing of its affairs via public

interest directors and the like3 Encouraging or mandating the active participation of all or many of its

shareholders